Solving The S&l Crisis With Equity For Those In Need

WASHINGTON — The savings-and-loan crisis is to economic theorists what the Bible is to religionists: There`s something in it to justify virtually any doctrine you care to name.

It is either deregulation gone haywire or the result of too much reliance on government. It is the result of local economic conditions, or it is the inevitable outcome of merger-mania. It is caused by faltering confidence in the thrift institutions or else overconfidence in the federal government`s willingness to bail out the improvident.

And if the multibillion-dollar crisis provides credence to any number of theoretical causes, it also furnishes the basis for a like number of cures. Some would let the industry collapse from the weight of its own mismanagement. Others, like Henry Butler, author of a new Heritage Foundation study, say the solution is a shift from federal deposit guarantees to private insurance.

My own inclination, doubtless guided as much by political predisposition as by logic, comes close to the position advocated by the Financial Democracy Campaign, a coalition of labor, civic, church and consumer groups.

It begins with the notion that the only justification for federal involvement in the S&L industry is the public good, principally its role in providing loans for home purchases and small businesses. Whatever the cause of the crisis-nearly a third of the nation`s 3,000 S&Ls are approaching insolvency-the industry has moved sharply away from this basic role.

The reasons seem clear enough. The S&Ls use higher interest payments as a way of attracting depositors, then undertake potentially lucrative but unusually risky loans in order to generate the funds to pay the interest.

As Jim Hightower, the colorful Texas agriculture commissioner, told the House Banking Committee, mortgage lending by Texas thrifts has plummeted as a result of the institutions` shift to high-risk loans.

And how has the government responded when these risky deals land an S&L in trouble? By encouraging takeovers by larger, often distant, thrifts, to keep depositors from losing their funds. But these larger thrifts may have little interest in the lcoal communities.

Hightower told of the small-town Texas mayor who, when he tried to make a $1,000 loan at his S&L, was told that a ``nonloan`` policy was in effect. The thrift, Cameron County Savings, had been taken over by Coastal Ban Savings Association of Houston under a plan that has allowed a dozen big institutions to acquire 88 locally owned thrifts.

Said Hightower: ``Who are these guys? Depositors in Corpus Christi, Gonzales, Lampasas, Luling, San Antonio, Seguin and Yoakum now find their money, and their borrowing fate, in the hands of something called Pacific USA, which is not to be found in the USA at all, but across the water in Taiwan. It is a subsidiary of the Pacific Wire and Cable Co., one of the largest conglomerates in Taiwan.``

So what would the Financial Democracy Campaign do about the situation? It has recommended a number of steps, including these four:

First, instead of the taxpayer bailout proposed by President Bush, it would put the cost of cleanup on those who have profited from eight years of regulatory permissiviness.

Second, it would establish a fund, capitalized by the entire financial-services industry, to provide affordable housing for all Americans.

Third, it would outlaw redlining, a device by which entire geographic areas, usually areas occupied by blacks and Hispanics, are closed to loans.

Fourth, it would require local S&Ls to reinvest in the communities in which they are located, perhaps as the price of federal insurance for their depositors.

As Hightower puts it, it is neither logical nor economically just for a handful of speculators to make a bundle of money while the taxpaying public underwrites their risks.

The troubles of the savings-and-loan industry constitute, quite literally, a crisis, a turning point. We can abandon the industry as no longer serving an important public function, and let the speculators pay the price for their own greed. Or we can bail it out.

Since abandonment would hurt too many people who had nothing to do with creating the crisis, I favor a federal bailout. But only if the institutions agree to resume the role they were intended to serve: financing the homes and small businesses of the American people. All of them.